Who Would Benefit if the Big Three Disappeared?

The day before chiefs of the Big Three automakers went to Washington in mid November to plead for a $25-billion rescue package, Honda opened an assembly plant in southern Indiana. Detroit may be on life support, but there would be plenty of companies ready to pick up pieces of their market share if America's automakers were to go under.

And what a market share it would be to split. Together, General Motors (symbol GM), Ford (F) and Chrysler, which isn't publicly traded, account for 40% of the automobiles sold in the U.S. So who would benefit if the U.S. auto industry collapsed, and how could you cash in on that possible scenario?

Let's start with Honda (HMC). With vehicles that are perceived as offering good value and fuel economy, Honda would benefit immediately from Detroit's disappearance. In a weaker economy, consumers would likely gravitate even more toward fuel-efficient Civics and Accords.

Motorcycles, another big component of the Honda lineup, are selling well, particularly in emerging markets, where they are the primary mode of transportation for many families. "Their product lineup is much more tailored for this type of environment," says Patrick Becker Jr., chief investment officer of Becker Capital Management, in Portland, Ore. "We don't see a fast market-share gain for Honda, but we do see a continued execution of the company's business strategy."

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Compared with its U.S.-based rivals, Honda is in much better financial shape. According to Standard & Poor's, Honda, with total long-term debt of $18.4 billion, has a debt-to-capital ratio of 28%. GM, with long-term debt of $38.3 billion, has a debt-to-capital ratio that's off the charts -- nearly 1,400%.

Honda's stock hung tough through September, then fell victim to the panic selling that afflicted stocks around the world. At its December 2 closing price of $20.50, Honda's American depositary receipts are 43% below their June highs. Analysts expect earnings per share of $2.24 for the fiscal year that ends in March 2009, giving the stock a price-earnings ratio of 9.

Toyota Motor (TM) is arguably the strongest of the Japanese automakers, but it wouldn't benefit as quickly as Honda from a collapse of the U.S. automakers. That's because its diversified product mix includes pickup trucks and sport utility vehicles. A customer who is thinking about buying a Dodge Ram, for example, may not be quick to buy a Toyota Tundra instead if Chrysler goes under.

Like Honda, Toyota is well positioned to weather tough times. Its ratio of long-term debt to capital is a modest 32%, and the company held $19.5 billion in cash as of September 30. "Toyota is a strong operator that delivers value without resorting to financial engineering," says Jeff Auxier, manager of the Auxier Focus fund.

Toyota's American depositary shares closed at $61.95, nearly 50% below their February highs. Analysts expect earnings of $3.47 per share for the fiscal year that ends in March. Reflecting rapidly weakening global economies, the average estimate has been slashed from $8.33 per share in just the past 90 days.

Losing three big customers doesn't seem like a positive, but Johnson Controls (JCI) could actually benefit from that situation in the long term. Johnson is a diversified manufacturer that produces, among other things, car interiors. But in recent years, says Morningstar analyst David Whiston, the Milwaukee company has been focusing more on its building-efficiency segment, which provides energy-saving technologies to homes and businesses. Automotive interiors accounted for 51% of total sales in 2007, down from 69% in 2005.

Because Johnson Controls is diversified, it's in a good position to withstand the disruption caused by the Big Three's demise, which would be much more harmful for smaller companies that serve only the auto industry. "Eventually, the company will be able to get more market share, albeit it may be of a smaller market," says Whiston.

At $16.67, Johnson shares are down about 55% from their past year's high. They sell for nine times estimated earnings or $1.82 per share for the fiscal year that ends next September.

It's a far cry from being in the car business, but Epiq Systems (EPIQ) clearly stands to benefit if the Big Three file for bankruptcy. The Kansas City, Kan., company provides software to bankruptcy trustees and offers back-office services for complex bankruptcy proceedings. Epiq is handling the claims-administration work for the Lehman Brothers Chapter 11 filing, the largest bankruptcy in U.S. history. And it played the same role for bankruptcy cases involving Enron, WorldCom and UAL, parent of United Airlines. "Epiq specializes in large bankruptcies," says Becker. "So it would have a shot at winning the business from a GM filing."

Epiq shares have performed extraordinarily well since the financial crisis accelerated in mid September. Since closing at $10.66 on September 12, the stock has rocketed 52%, to $16.15. Over that same period, Standard & Poor's 500-stock index plunged 32%. The stock isn't cheap, selling at 22 times estimated 2009 profits of 72 cents a share.

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